Sustainable Entrepreneurship at the Base of the Pyramid

Sustainable Entrepreneurship at the Base of the Pyramid

by
Urs Jäger and Vijay Sathe

In Chapter 1 of the book Base of the Pyramid 3.0 the authors explain the importance of a company’s purpose, vision, ambition and capability to its business development at the base of the pyramid (BoP). In this article they elaborate on how the wisdom of Peter Drucker allows a company to build on these fundamentals to promote sustainable entrepreneurship at the BoP.

“Sustainability is not something that is to be done in addition to strategy. It is a part of strategy and can lead to improved competitiveness.”

“Turn your BoP challenges into business opportunities by analyzing the BoP space from the perspective of viability, legitimacy and competitiveness.”

The Challenges of Viability, Legitimacy and Competitiveness

One reason why companies fail at the BoP is their incomplete understanding of what competitiveness requires, especially in emerging markets. A company’s competitiveness is its ability to provide products and services that create as much or more value for customers than do competitors, thus leading to above-industry-average financial performance. This is true for companies in the industrialized countries. It is also true for companies operating in the less developed countries such as those in India, but they must also deal with two other challenges before they can compete. First, they must be able to function despite informal markets, weak institutions and poor infrastructure such as bridges, roads, and security systems. Thus their first challenge is viability. Their second challenge is legitimacy within the local communities and societies in which the company operates. In less developed countries like India, where a large percentage of the country’s population lives in poverty, a company’s growth and financial success need to be legitimized in order to secure the social license to operate.

Consider an example from Brazil, where the cosmetics giant Natura expanded into many neighboring markets in Latin America. Serafeim, Eccles and Ribot (2013, p. 10) have argued that: “As a result of shortcomings in the Brazilian state… (e. g., high levels of poverty and corruption and low levels of education and provision of health care), Natura found itself in the situation many large and prominent companies do that are operating in emerging markets: providing services that would be provided by the government in more developed countries.” Natura’s efforts to improve education in Brazil, which is one of its six sustainability priorities, is seen as a CSR activity because it benefits Brazilian society but at a cost to its shareholders. Can Natura explain to its shareholders that investments in other developing countries should also be seen as a  CSR activity? Or does it need a different approach? A review of Peter Drucker’s writings can help answer this question.

Peter Drucker’s wisdom on sustainable competitiveness  

Much of today’s understanding of management is, in some way or other, related to the work of Peter F. Drucker (1954, 1973/74 and 2003). This can also be asserted in the field of sustainability. His famous proposition that every social problem is a business opportunity in disguise shows how strongly he saw the relation between social/environmental issues and competitiveness. He can thus be seen as the mastermind of the idea we today call “shared value”.  Based on Drucker’s wisdom, we offer three guidelines that companies operating at the BoP should follow to promote sustainable entrepreneurship:

1. a) Sustainability for strategy; not strategy for sustainability: Successful companies do not focus on sustainability per se (following Drucker’s advice that companies should focus on profit and not on CSR), but on strategy and how solutions to sustainability challenges can be incorporated into a company’s business strategy for increased competitiveness. In a nutshell, sustainability is not something that is to be done in addition to strategy. It is a part of strategy and can lead to improved competitiveness.

1. b) Practical, not theoretical task: Drucker advises managers not to forecast, because this assumes continuity between the past and the future. With forecasts managers argue theoretically and ignore reality. He proposes to analyze future effects today and to exploit those opportunities. Successful companies thus do not view the task of integrating the three bottom lines as a theoretical task – like forecasting – or as an ideal based on the normative paradigm of sustainability from the enlightenment literature (“thou shall do good”). Rather, for companies it is about how to analyze and exploit opportunities in the present to improve all three bottom lines by developing and implementing business strategies to get to the best possible solutions for the foreseeable future (see also the argument of Amartya Sen (2010) in his work on justice).

1. c) Viability, Legitimacy and Competitiveness: Drucker reminded managers that successful companies need a functioning society based on status (position in one’s group) and order (rules of the game). If status and order are missing, business needs to substitute for them. Following Drucker, sustainable entrepreneurship that leads to competitiveness includes status/order (viability and legitimacy) and function (competitiveness). To be sustainable, entrepreneurship must ensure the company’s viability (“we need to do it to be able to function”), legitimacy (“the company needs to help the environment and society to secure a license to operate”), and competitiveness (“we can meet or beat the competition”). In the less developed world characterized by market failure and institutional weakness (due to less developed capital and financial markets, less educated consumers and lower purchasing power, weaker enforcing institutions and NGOs, etc.) the “sustainability market” may not know or may not care about the improvements in sustainability performance. But even if this is the case, investments to improve social and environmental performance may nonetheless be necessary to ensure the firm’s viability and legitimacy, as the following examples show.

Contrasting cases of sustainable competitiveness

Chiquita  

Chiquita Brands International is known for its banana sales. It is a multinational corporation with a long history, having begun in 1871 as United Fruit Company (the name was changed to Chiquita in 1990). As of 2007, the company’s annual sales totaled US$4.5 billion and it was operating in 70 countries. Despite its success, however, Chiquita entered the twenty-first century with involvement in scandals regarding payoffs to paramilitary groups in Colombia.

1. a) Sustainability for strategy; not strategy for sustainability: In 2004, the British Broadcasting Corporation (BBC) informed the public that Chiquita Brands International had made payoffs to paramilitary groups in Colombia in order to secure the safety of its employees. Such payoffs, while common in many Latin American countries, were illegal in Colombia, as well as in the USA. A few years later, Chiquita was faced with a US Department of Justice inquiry, and was fined close to US$25 million. The challenge that resulted was: What does sustainability mean for a company that does business in countries where corruption is part of daily business?

1. b) Practical, not theoretical task: The Chiquita payoffs were motivated by the need to secure the safety of the company’s employees and their 387 family members. Over three years, Chiquita paid a total of US$1.7 million to the ‘Autodefensas Unidas de Colombia’, despite the knowledge that it was recognized as a ‘terrorist’ organization by the US Department of Justice. The paramilitaries allegedly used the money for international arms trafficking. Chiquita understood that payoffs to paramilitary groups were considered illegal in Colombia. Apparently, Chiquita did not search and exploit opportunities to protect their employees, earn money and not violate the laws in Colombia and the USA.

1. c) Viability, Legitimacy and Competitiveness: It is difficult to judge Chiquita’s action in Colombia, as it was essentially investing in the security of its employees within a highly dangerous region (challenge to viability). Nevertheless, the violation of USA and Colombian laws and the expected negative long-term impact of the paramilitary’s action in arms trafficking both add up to highly negative impacts in social and economic terms (challenge to legitimacy). Chiquita thus hurt its social and economic value.

Magazine Luiza

Magazine Luiza is Brazil’s third-largest nonfood retailer. It has experienced exceptional sales growth and strong customer loyalty via its focus on serving low-income clients with innovative technology.  Its customer-oriented approach and a personnel-centered culture are noteworthy and difficult to copy.

1. a) Sustainability for strategy; not strategy for sustainability: Magazine Luiza recognizes the difference between high-, middle- and low-income customers. Low-income customers may be illiterate, having had little formal schooling, and tend to be conservative, sticking to familiar procedures. They may be technologically savvy, but are intimidated by computerized or sophisticated sales approaches. The challenge for Magazine Luiza is to meet the needs of the poor and serve them appropriately (sustainability) in order to be profitable (competitiveness).

1. b) Practical, not theoretical task: Magazine Luiza aims to target low-income communities accordingly in terms of product development and marketing. First, it treats low-income customers in a very personal manner. In validating credit financing, a customer’s income stability is considered more important than his/her income level, and both formal and informal sources of income are considered. Finally, the company recognizes that the employee–customer relationship is the most important connection. In addition, they also put significant effort into catering to their employees. In 2003, Magazine Luiza was recognized as Brazil’s best employer.

1. c) Viability, Legitimacy and Competitiveness: Magazina Luiza redefines poverty by perceiving the poor as customers with their own needs and life conditions and not as “poor humans in need”. In that way, it creates a new market to make the company function (viability). It focuses on the relation between the firm’s employees and the customers to legitimize the company’s services (legitimacy). And it creates effective and efficient sales processes to increase its competitive advantage (competitiveness).

 Magazina Luiza is a success story as it shows how to perceive and pursue business opportunities in low-income markets by redefining the poor as customers. The firm treats low-income customers in a personal manner by focusing on the employee–customer relationship. Chiquita provides a contrast that is important for learning about sustainability and competitiveness because it highlights what companies that operate at the BoP commonly encounter—the need to deal with criminal groups and act according national and international laws at the same time. Chiquita decided to focus on the challenge of dealing with paramilitary groups only and ignored the national and international laws. They focused on viability and ignored legitimacy. 

These examples show that sustainability is part of strategy and can lead to improved competitiveness. The term “competitiveness” assumes that the company is viable (can function) and legitimate (has society’s license to operate). These cannot be taken for granted in the industrialized world and, as the cases show, even less so in the developing world.  They are the necessary but not the sufficient conditions to be competitive in terms of as good or better value of products and services, and economic performance, than rivals. It is generally more challenging to secure viability and legitimacy in the less developed countries than it is in the industrialized countries.

The examples also show that sustainability is not about the creation of company guidelines or glamorous folders. Using sustainability to improve competitiveness is an ongoing task that needs to be repeated again and again. Sustained entrepreneurship at the BoP requires companies to replace their business glasses with Peter Drucker’s lenses for perceiving, developing and implementing strategies that address the need for viability and legitimacy (status/order) and competitiveness (function).

To end with our opening question, how can Natura explain to its shareholders that investments in society make sense also from a profit perspective? We would say, to paraphrase Peter Drucker’s famous line that “every social problem is a business opportunity in disguise”: Turn your BoP challenges into business opportunities by analyzing the BoP space from the perspective of viability, legitimacy and competitiveness. As long as society does not function – and is not supported by effective and efficient institutions – the company has to invest in society, to secure its viability and legitimacy in order to be competitive. 

References

Drucker, P. F. (1954). The Practice of Management. New York: Harper & Row.

Drucker, P. F. (1973). Management: Tasks, Responsibilities, Practices. New York: HarberBusiness.

Drucker, P. F. (2003). The New Realities. Brunswick, London: Transaction.

Georgios Serafeim, Eccles, R. G., & Ribot, S. (2013). Teaching Note—Natura Cosmeticos, S.A. In H. B. School (Ed.).

Sen, A. (2010). The Idea of Justice. London: Penguin Books.